SaaS Metrics That Get Investors’ Attention (Views: 1002)
As has been stated time and time again by entrepreneurs spanning countless industries, there is no one-size-fits-all model for constructing a successful startup. Indicative of this point were the 2018 Fundica Roadshow panels, where CEOs of everything from sports analytics to audio production companies explained the wildly different ways that they achieved success. Unsurprisingly, these differentiations occur even on businesses’ most granular levels, where metrics and data analysis are concerned. That said, for any given startup at any given stage in any given industry, certain metrics are almost guaranteed to be more useful than others. Here, we explore those which are most important to early-stage, subscription-based companies looking to fundraise.
Fábio Mazzeu of SaaSholic, who once stated that the five metrics all subscription businesses should track were monthly recurring revenue (MRR), customer lifetime value (LTV), customer acquisition cost (CAC), average revenue per account (ARPA), and churn, later amended this claim, adding that where you are in the funding process will naturally dictate which metrics are most important. Above all else, he argues, your key metrics should be focused, actionable, and subject to change as your company grows, moving from qualitative feedback towards more quantitative figures. For a complete look at which metrics you should hone in on, read his article.
Just as important as which metrics you’re focusing on, however, is how you’re interpreting them and whether you’re able to justify these interpretations to investors and your board of directors. David Skok, penning his own thoughts about SaaS metrics, particularly as they pertain to growth stage companies, notes that the trough of subscription businesses’ LTV:CACs can be especially difficult to convey to backers, who may expect exponential growth and profit from investment to exit. Plotting hypothetical figures on a graph, he demonstrates that a successful--and thus investment-worthy-- company should have an LTV that is at least three times greater than its CAC, and that CAC should be made back in within twelve months of acquiring said customer. He also stresses the difference between SaaS companies with primarily monthly contracts and those with primarily annual contracts; unsurprisingly, companies with the former focus should watch their MRR while those with the latter focus should watch their ARR. Perhaps Skok’s most enlightening point, however, is almost his most obvious; as a subscription-based company, you want to achieve negative churn--in other words, acquire more subscriptions that you lose. Skok suggests that the best way to do this without increasing CAC is to augment your expansion revenue, upselling, cross-selling, and using a pricing scheme with a variable axis to get more value from your existing customers. For Skok’s complete thoughts, visit his blog.
Brad Feld added his own formula to these growth measurements when he took note of a fellow investor’s 40% rule of thumb. The rule of 40%, he explains, is that “your growth rate + your profit should add up to 40%. So, if you are growing at 20%, you should be generating a profit of 20%. If you are growing at 40%, you should be generating a 0% profit. If you are growing at 50%, you can lose 10%. If you are doing better than the 40% rule, that’s awesome.”
Tracking growth-related metrics is useful for more than just internal insight and improvement. Besides market potential, tangible traction is perhaps the most enticing thing you can present to a prospective investor, and LTV:CAC or growth rate:profit ratios are unmistakably more reliable than so-called vanity metrics like pageviews, running totals, or followers. (Tableau provides useful alternatives to these metrics here). Vanity metrics are the exact opposite of everything Mazeau exalts; they are unactionable and un-nuanced; and while they might look pretty on the opening slides of a deck, they’re unlikely to continue impressing investors five minutes into a pitch. Instead, Allan Willie, co-founder of Klipfolio suggests, companies should focus on more qualitative metrics, such as market potential (which should ideally exceeds $1B globally), competitive advantage (measured via product, process, price point, or super niche differentiation), the collective resume of your management team, cultural harmony, and financial strategy. Lawtrades (and likely many other entities), would add to this list product-market fit, business model, and strength of demand.
If a growth stage company manages to acquire a VC backer, Lawtrades suggests that this funding be used to cover the aforementioned CAC. “A series A investment,” they suggest, “should generally cover the company’s losses for 18-24 months”. Put differently, a growing company’s burn rate should be about two years. This relates nicely to our previous article on VC investments, which urged early-stage companies to ensure that they are self-sustaining before they begin fundraising; if this is done, investments go towards growth tactics, rather than crucial operations.
To summarize, though SaaS metrics should be tailored to suit the capital structure and funding goals of a startup, certain metrics are almost guaranteed to be more valuable--for both entrepreneurs and their potential backers. Vanity metrics can be observed and celebrated but shouldn’t be a fundamental part of any pitch deck. Ultimately, however, companies should change the data they collect and analyze to in accordance with their funding stage (ex. pre-seed or Series A), industry (ex. healthcare vs. mobile game apps), and business model (ex. B2B or B2C). As Charles Darwin proved so many years ago, adaptability is key.